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Japan’s Corporate Backseat Drivers

Mori Kazuo [Profile]

[2018.06.01]

It has been common in Japan for retired executives to remain at their companies in loosely defined advisory roles. And some continue to exert influence on management. This distinctively Japanese practice is now under critical scrutiny.

When Japanese company presidents and others in senior executive posts retire, they have commonly continued to serve in an amorphous advisory capacity as sōdan’yaku or komon, terms that lack standard English equivalents. But this traditional practice has come under critical scrutiny since the administration of Prime Minister Abe Shinzō identified improved corporate governance as a plank of its economic growth strategy.

To raise the growth rate, it is necessary to increase the earning power of Japan’s companies, which compares unfavorably with that of their Western counterparts. As the administration sees it, the reason for this shortcoming is their failure to undertake bold restructuring. And this failure, in turn, is seen as resulting from inadequate corporate governance. Hence the drive for reform in this area.

As a first step, the administration adopted steps to promote management for enhancement of capital efficiency, such as through the addition of board members from outside the company to monitor and supervise corporate management. And the presence of sōdan’yaku and komon, retired executives who can potentially intervene in management decisions either openly or from behind the scenes, emerged as an issue in this connection.

Not all but certainly some of these former executives wield clout over their successors, even though they have no legal authority or responsibility to do so. They become “backseat drivers,” calling out directions from behind to the person at the wheel.

An Opaque, Uniquely Japanese Pair of Posts

In January 2017, at the fourth meeting of the Council on Investments for the Future, a public-private panel to discuss growth strategy, Prime Minister Abe, who chairs the panel, declared, “We will eliminate the opaque influence of retired executives on their former businesses, and make it possible for companies to make bold business decisions by strengthening the supervisory functions of their boards of directors.(*1)

The “opaque influence” to which the prime minister referred is that of sōdan’yaku and komon. These posts have no basis in corporate law, and the roles, compensation, and other particulars relating to those who hold them vary from company to company. Furthermore, these details do not need to be disclosed. In Western countries there is basically nothing like this sort of arrangement allowing former chief executives to stick around in the company after they retire. For this reason, there is no set of standard English equivalents for these terms.

In general, the post of sōdan’yaku is held by people who retired after serving as chairman of the board or president. Major corporations use various titles for them in English, such as “advisor,” “counselor,” “senior advisor,” “executive advisor,” and “executive counsel.” The title komon, which is used for other former executives, is commonly rendered as “advisor” in English, but some companies use “executive advisor.” As a further complication, at some organizations sōdan’yaku serve for fixed terms, after which they are given new titles, such as saikō [highest, chief] komon or tokubetsu [special] komon. In Japanese these titles have more of an honorary ring than sōdan’yaku. But in English they are rendered with weighty-sounding titles like “chief board advisor” and “senior corporate advisor.” Given all the variety and overlapping of terminology in translation, the English titles printed on the business cards of the retired executives do not make it clear which of the above posts they hold.

Takeda and Toshiba: Complaints from Shareholders

Some investors have voiced concern about the involvement of these former executives in corporate management. One example of a company where this has become an issue is Takeda Pharmaceutical. When Hasegawa Yasuchika, chairman of the board (and former president), stepped down last year and was named sōdan’yaku (which Takeda translates as “corporate counselor”), a number of shareholders opposed his appointment to this post and submitted a motion against it at the company’s general meeting in June. At the time Hasegawa himself, when asked about his new post, wryly replied, “I’m a sōdan’yaku with a bad reputation.”

The motion was defeated, but Takeda’s president, Christophe Weber, subsequently sent an open letter to all the company’s shareholders seeking their understanding for Hasegawa’s appointment to this post. As Weber explained, Hasegawa would have two roles as sōdan’yaku: (1) to offer advice in response to requests from management and contribute to the company by tapping his network of outside contacts; and (2) to serve in posts at outside organizations as the company’s representative. Weber further indicated his view that Hasegawa would very rarely offer advice to management and that his main role would be the second one. Hasegawa’s annual compensation as sōdan’yaku was set at about 12% of what he had received as chairman of the board, and he was not provided with either a company car or a full-time secretary.

I doubt that Hasegawa will deliberately interfere in Takeda’s management, but there are companies where this has happened. Toshiba is one example. In April 2015, when an accounting scandal at the company came to light, Toshiba had a total of 17 sōdan’yaku and komon. Three former presidents, Nishimuro Taizō, Okamura Tadashi, and Nishida Atsutoshi were serving as sōdan’yaku, while two additional former presidents who had stepped down as sōdan’yaku after turning 80 held the title of tokubetsu [special] komon. Twelve others who had held senior executive posts before they retired were continuing to serve as jōnin [permanent] komon or komon. Some of these former executives were involved in matters like the assignment of top-level posts.

These people may have been honestly trying to help the company at a dangerous juncture, but in reality they were just being noisy backseat drivers. In the face of shareholder complaints and media criticism, Toshiba abolished the post of sōdan’yaku with a vote at its general meeting of shareholders in June 2016.

Ajinomoto: An Egregious Example of Sōdan’yaku Power

A particularly prominent case of interference in management by former executives occurred in 1997 at Ajinomoto, one of Japan’s leading food manufacturers, when the company was found to have made illegal payoffs to sōkaiya—gangsters who extort money by threatening to cause disturbances at shareholders’ meetings.

At the time Ajinomoto had four formidable sōdan’yaku who had previously headed the company: Director and Honorary Chairman Suzuki Saburōsuke IV (a scion of the founding family), Suzuki Kyōji, Watanabe Bunzō, and Utada Katsuhiro. All were in their seventies or eighties. Suzuki Kyōji had married into the founding family; the other two were not family members.

Saburōsuke IV’s position as both a member of the board of directors and a sōdan’yaku was anomalous inasmuch as the latter title is normally held by former executives who are no longer actively involved in management. But in earlier times powerful figures at some companies had even continued to be representative directors—top executives empowered to sign contracts and otherwise act on behalf of the company—after becoming sōdan’yaku.

An unusual feature of Ajinomoto’s management was that at meetings of the board a row of sōdan’yaku occupied the seats directly facing the president. Egashira Kunio, who became president in 1997 and moved to break the hold of these company elders, said that the board meetings had become occasions where the president was reporting to the sōdan’yaku, and that it was not possible to hold meaningful discussions.

According to a person familiar with Ajinomoto’s inner circle, the company in those days was divided into two camps: those supporting the dominance of members of the founding family and other corporate elders and those seeking to reform this status quo. This rivalry surfaced when Toba Tadasu was ousted from his post as president in 1995.

Toba came into conflict with Saburōsuke IV over the naming of his successor as president. He favored Egashira, who belonged to the reform camp within the company, but the honorary chairman was leery of him. The post ended up going to Inamori Shunsuke, who had been serving as head of the beverage maker Calpis, an Ajinomoto subsidiary. Inamori was the same age as Toba, and his appointment was interpreted as a stopgap move. (Toba, meanwhile, was kicked upstairs to the relatively powerless post of vice chairman; a year later he left to head president of supermarket-chain operator Daiei.)

Two years later, when the payoffs to sōkaiya racketeers came to light, Inamori stepped down to take responsibility, and the conflict between the two camps emerged again. According to Egashira, the two Suzuki sōdan’yaku (Saburōsuke IV and Kyōji) called on Inamori to yield his post to a candidate whom they favored, and Inamori was feeling pressed to comply. But Egashira urged him not to, saying that he would regret it forever if he did. He argued that the key task was to turn Ajinomoto into a “proper” corporation, meaning one where the current executives could manage without interference from the Suzukis and other company elders.

Heeding these words, Inamori changed his mind and selected Egashira to succeed him. And when Inamori stepped down, Saburōsuke IV also resigned from the board of directors. Upon becoming president, Egashira met individually with the sōdan’yaku and got them to stop attending meetings of the board. He moved their offices from the main headquarters building to an annex, imposed an age limit of 75 on holders of the post, and limited their number to three. But he subsequently declared that it had been extremely difficult to eliminate the hold of the retired presidents on Ajinomoto’s management.

Private Offices and Support Staff

Not all the former executives serving as sōdan’yaku or komon are geriatric drags on corporate management. Some discipline themselves and work at activities that contribute to society. But are these posts truly necessary? In January 2017, at the eighth meeting of the Corporate Governance System Study Group set up by the Ministry of Economy, Trade, and Industry, Miyokawa Yoshirō, a senior executive at Astellas Pharma, spoke out clearly against them. He said he was extremely grateful that his predecessors on the company’s executive team had long ago abolished these posts and could see absolutely no sense in reinstating them. He also offered the opinion that the time had come to change the practice of having extremely capable people stay in a single company for a long time.

According to a METI survey of all the companies listed on the Tokyo Stock Exchange, around 80% have systems for appointing sōdan’yaku and komon, and about 60% actually have people in these posts. Of those that do, roughly half give them private offices and support staff, and about 80% pay them.

At companies with permanent employment systems, the current chief executives probably consider it prudent to provide generous arrangements for the predecessors to whom they are indebted for their positions. And in Japan, where people set great store by titles, executives who step down often take it for granted that the company will give them a title like sōdan’yaku, accompanied by a certain level of pay and other perks.

Ongoing Moves Toward Reform

The Japanese practice of appointing sōdan’yaku and komon continued for a long time without attracting much attention, but that seems to be changing. The Tokyo Stock Exchange requires listed companies to submit an annual report on their corporate governance, and starting this year the report form includes a section for providing information about former chief executives who continue to hold advisory positions within the company. The requested information concerns only retired presidents and chief executive officers, and submission is voluntary. Even so, this step can be expected to lead to progress in disclosure.

What role do sōdan’yaku play? Interest in this question is on the rise, both within companies and outside them. We are likely to see increased moves against the dual structure under which retired executives wield power alongside their successors. And it seems certain that the existing trend toward review and elimination of the posts of sōdan’yaku and komon will gain additional momentum.

(Originally published in Japanese on May 8, 2018. Banner photo: Office buildings clustered around Tokyo Station house the headquarters of many major Japanese corporations. © Jiji Press Photo.)

(*1) ^ English translation from https://japan.kantei.go.jp/97_abe/actions/201701/27article1.html.

  • [2018.06.01]

Journalist. Born in Tokyo in 1950. Graduated from Waseda University, where he majored in economics. Has been deputy chief editorial writer at Nihon Keizai Shimbun (Nikkei) and visiting researcher at the Weatherhead East Asian Institute and Center on Japanese Economy and Business, Columbia University. Works include Nihon no keiei (Japanese Management) and Keiei ni karisuma wa iranai (Managers Don’t Need Charisma).

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